SELECTING AND MANAGING ENTRY MODES CHAPTER XIII SELECTING AND MANAGING ENTRY MODES

Learning Objectives Explain why and how companies use exporting, importing, and countertrade. Explain the various means of financing export and import activities. Describe the different contractual entry modes that are available to companies Explain the various types of investment entry modes Discuss the important strategic factors in selecting an entry mode.

I. EXPORTING, IMPORTING, AND COUNTERTRADE Why Companies Export Developing and Export Strategy: A Four-Step Model Degree of Export Involvement Avoiding Export and Import Blunders Countertrade Export/ Import Financing.

I.1 Why Companies Export Three reasons: Expand Sales Diversify Sales Gain Experience

I.2 Developing and Export Strategy: A Four-Step Model Step 1: Identify a Potential Market Step 2: Match Needs to Abilities Step 3: Initiate Meetings Step 4: Commit Resources

I.2.1 Step 1 Identify a Potential Market Market research should be performed and the results interpreted Novice exporters should focus on one or only a few markets.

I.2.2 Step 2: Match Needs to Abilities Assess carefully whether the company has the ability to satisfy the need of the market

I.2.3 Step 3: Initiate Meetings Having meeting early with potential local distributors, buyers, and others is a must Initial contract should focus on building trust and developing a co-operative climate among all parties.

I.2.4 Step 4: Commit Resources After all the meetings, negotiations, and contract signings, it is time to put the company’s human, financial, and physical resource to work.

I.3 Degree of Export Involvement Direct Exporting Indirect Exporting

I.3.1 Direct Exporting Direct Exporting Practice by which a company sells its products directly to buyers in a target market. Sales Representatives Distributors

I.3.2 Indirect Exporting Indirect Exporting Practice by which a company sells its products to intermediaries who resell to buyers in a target market. Agents Export Management Companies (EMC) Export Trading Company (ETC)

I.3.2 Indirect Exporting Agents Individuals or organizations that represent one or more indirect exporters in a target market Export Management Companies (EMC) company that exports products on behalf of indirect exporters Export Trading Company (ETC) Company that provides services to indirect exporters in addition to activities related directly to clients’ exporting activities.

I.4 Avoiding Export and Import Blunders Freight Forwarder Specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees.

I.5 Countertrade Countertrade Practice of selling goods or services that are paid for, in whole or part, with other goods or services.

I.5 Countertrade… Types of Countertrade Batter Counterpurchase Offset Switch Trading Buyback

I.5 Countertrade… Batter Exchange of goods or services directly for other goods or services without the use of money. Counterpurchase Sales of goods or services to a country by a company that promise to make a future purchase of a specific product from the country.

I.5 Countertrade… Offset Agreement that a company will offset a hard- currency sale to a nation by making a hard- currency purchase of an unspecified product from that nation in the future.

I.5 Countertrade… Switch Trading Practice in which one company sells to another its obligation to make a purchase in a given country.

I.5 Countertrade… Buyback Export of industrial equipment in return for products produced by that equipment.

I.6 Export/ Import Financing Advance Payment Documentary Collection Letter of Credit Open Account

I.6.1 Advance Payment Advance Payment Export/ Import financing in which an importer for merchandise before it is shipped.

I.6.2 Documentary Collection Export/ Import financing in which a bank acts as an intermediary without accepting financial risk.

I.6.2 Documentary Collection High Open Account Document Collection Exporter’s risk Letter of Credit Advance Payment Low High Importer’s risk Risk of Alternative Export/ Import Financing Methods

I.6.2 Documentary Collection Process 1 Exporter Importer 3 7 6 2 4 9 8 Exporter’s Bank Importer’s Bank 5 1. E/ I contract to sell/ buy goods 2. E’s bank gives draft to E 3. E ships goods to I 4. E delivers documents to its bank 5. E’s bank sends documents to I’s bank 6. I delivers payment to its bank 7. I’s bank gives bill of lading to I 8. I’s bank pays E’s bank 9. E’s bank pays E for goods.

I.6.2 Documentary Collection Draft (bill of exchange) Document ordering an importer to pay an exporter a specified sum of money at a specified time. Bill of Lading Contract between an exporter and a shipper that specifies merchandise destination and shipping costs.

I.6.3 Letter of Credit Letter of Credit Export/ import financing in which the importer’s bank issues a document stating that the bank will pay the exporter fulfills the terms of the document. Several types of letters of credit: An irrevocable letter of credit A revocable letter of credit A confirmed letter of credit

I.6.3 Letter of Credit Exporter Importer 1 5 11 9 2 4 6 7 10 Exporter’s Bank Importer’s Bank 8 3 1. E/ I contract to sell/ buy goods 2. I applies for letter of credit (L) 3. I’s B issues L to E’s B on I’s behalf 4. E’s B informs Economic of L 5. Economic ships goods to I 6. E delivers documents to its B 7. E’s B checks documents & pays E 8. E’s B delivers documents to I’s B 9. I pays its B for value of goods 10. I’s B sends payment to E’s B 11. I’s B delivers documents to I

I.6.4 Open Account Open Account Export/ import financing in which an exporter ships merchandise and later bills the importer for its value.

II. CONTRACTUAL ENTRY MODES Licensing Franchising Management Contracts Turnkey Projects

Advantages of Licensing Disadvantages of Licensing II.1 Licensing Advantages of Licensing Disadvantages of Licensing

II.1 Licensing Licensing Practice by which one company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time.

II.1 Licensing… Cross Licensing Practice by which companies use licensing agreements to exchange intangible property with one another.

II.1 Licensing… Here are few examples of successful licensing agreements: NOVELL (US) licensed its software to three HK universities that installed it as the campus-wide standard. HITACHI (Japan) licensed from Duales system Deutschland (Germany) technology to be used in the recycling of plastics in Japan. HEWLETT-PACKARD (US) licensed from Canon (Japan) a printer engine for use in its monochrome laser printers.

II.1 Licensing Advantages of Licensing Licensors can use licensing to finance their international expansion. Licensing can be a less risky method of international expansion for a licensor than other entry modes. Licensing can help reduce the likelihood that a licensor’s product will appear on the black market Licensees can benefit from licensing by using it as a method of upgrading existing production technologies.

II.1 Licensing Disadvantages of Licensing Licensing can restrict a licensor’s future activities. Licensing might reduce the global consistency of the quality and marketing of a licensor’s product in different national markets. Licensing might amount to a company “lending” strategically important property to its future competitors.

II.2 Franchising Franchising Practice by which one company (Franchiser) suppliers another (the franchisee) with intangible property and other assistance over an extended period.

II.2 Franchising Some examples of the kinds of companies involved in international Franchising: OZEMAIL (Australia) awarded Magictel (HK) a franchise to operate its Internet phone and fax service in HK JEAN-LOUIS DAVID (France) awarded franchises to more than 200 hairdressing salons in Italy BROOKS BROTHERS (US) awarded Dickson Concepts (HK) a franchise to operate Brooks Brothers stores across Southeast Asia.

II.2 Franchising Advantages of Franchising Franchisers can use franchising as a low-cost, low risk entry mode into new markets. Franchising is an entry mode that allows for rapid geographic expansion. Franchiser can profit from the cultural knowledge and know-how of local managers.

II.2 Franchising Disadvantages of Franchising Franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets. Franchisees can experience a loss of organizational flexibility in franchising agreements. Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser’s other divisions.

II.3 Management Contracts Practice by which one company supplies another with managerial expertise for a specific period of time.

II.3 Management Contracts Some examples of Management Contracts BBA (Britain) DBS Asia (Thailand) LYONNAISE DE EAUX (France)

II.3 Management Contracts Advantages of Management Contracts A firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk. Governments can award companies management contracts to operate and upgrade public utilities, particularly when a nation is short of investment financing. Governments use management contracts to develop the skills of local workers and managers.

II.3 Management Contracts Disadvantages of Management Contracts Management contracts reduce the exposure of physical assets in another country Suppliers of expertise may end up nurturing a formidable new competitor in the local market.

II.4 Turnkey Projects Turnkey (Build- Operate-Transfer) Projects Practice by which one company designs, constructs, and test a production facility for a client firm.

II.4 Turnkey Projects Here are two examples of International Turnkey Projects Telecommunications Consultants India constructed telecom networks in both Madagasca and Ghana Lubei Group (China)

II.4 Turnkey Projects Advantages of Turnkey Projects Turnkey Projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone. Turnkey projects allow governments to obtain designs for infrastructure projects from the world’s leading companies.

II.4 Turnkey Projects Disadvantages of Turnkey Projects A company may be awarded a project for political reasons rather than for technological know-how Turnkey projects can create future competitors

III. INVESTMENT ENTRY MODES Wholly Owned Subsidiaries Joint Ventures Strategic Alliances Selecting Partners for Cooperation

III.1 Wholly Owned Subsidiaries Facility entirely owned and controlled by a single parent company.

III.1 Wholly Owned Subsidiaries… Advantages of Wholly Owned Subsidiaries Managers have complete control over day-to-day operations in the target market and over access to valuable technologies, process, and other intangible properties within the subsidiary.

III.1 Wholly Owned Subsidiaries… Disadvantages of Wholly Owned Subsidiaries Companies must finance investment internally or raise funds in financial markets. Risk exposure is high

III.2 Joint Ventures Joint Venture Configurations Advantages of Joint Ventures Disadvantages of Joint Ventures

III.2 Joint Ventures Joint Venture Separate company that is created and jointly owned by two or more independent entities to achieve a common business objective.

III.2.1 Joint Venture’s Examples Examples of Joint Ventures SUZUKI MOTOR CORPORATION (Japan & India government) BILTRITE CORPORATION (US & China)

III.2.2 Joint Venture Configurations Forward Integration Joint Venture Backward Integration Joint Venture Buyback Joint Venture Multistage Joint Venture

III.2.3 Joint Venture Advantages Companies reply on joint ventures to reduce risk Companies can use joint ventures to penetrate international markets that are otherwise off-limits. A company can gain access to another company’s international distribution network through the use of a joint venture. Companies form international joint ventures for defensive reasons.

III.2.4 Joint Venture Disadvantages Joint Venture ownership can result in conflict between partners. Loss of control over a joint venture’s operations can also result when the local government is a partner in the joint venture.

III.3 Strategic Alliances Relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each.

III.3.1 Strategic Alliance’s Examples Examples of Strategic Alliance SIEMENS (Germany) + HP (US) NIPPON LIFE GROUP (Japan) + PUTNAM INVESTMENT (US)

III.3.2 Strategic Alliance’s Advantages Companies use strategies alliances to share the cost of an international investment project. Companies use strategies alliances to tap into competitors’ specific strengths Companies turn to strategic alliances for many of the same reasons that they turn to joint ventures.

III.3.3 Strategic Alliance’s Disadvantages To create a future local or even global competitor A company can reduce the likelihood of creating a competitor that would threaten its main area of business A company can insist on contractual clauses that constrain partners from competing against it with certain products or in certain geographic regions. Conflict can arise and eventually undermine cooperation.

III.4 Selecting Partners for Cooperation Partner selection is a crucial ingredient for success. Now focus on partner selection on joint ventures and strategic alliances Every partner must be firmly committed to the goals of the cooperative arrangement Cooperation should be approached with caution.

IV STRATEGIC FACTORS IN SELECTING AN ENTRY MODE Cultural Environment Political and Legal Environment Market Size Production and Shipping Costs International Experience

IV.1 Cultural Environment The dimensions of culture-values, beliefs, customs, languages, religions- can differ greatly from one nation to another.

IV.2 Political and Legal Environments Political instability in a target market increase the risk exposure of investments. A target market’s legal system influences the choice of entry model. Firms tend to prefer investment when a market is lax in enforcing copyright and patent laws.

IV.3 Market Size The size of a potential market influences the choice of entry mode Rising income in a market encourage investment entry modes High domestic demand is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries. A market is likely to remain relatively small exporting, contractual entry.

IV.4 Production and Shipping Costs Setting up production in a market is desirable when the total cost of production there is lower than in the home market. Low cost local production: Licensing, franchising Turn out products with high shipping costs typically prefer local production Contractual and investment entry modes There are fewer substitutes, discretionary items  higher shipping and production costs Exporting.

IV.5 International Experience Illustrate the control, risk, and experience relationships of each entry mode Most companies enter the international marketplace through exporting Explore the advantages of licensing, franchising, management contracts, turnkey projects. To become comfortable in a particular market: joint venture, strategic alliances and wholly owned subsidiaries.

IV.5 International Experience Wholly Owned Subsidiary Management Contract Joint Venture/ Alliance Franchising Control Turnkey Project Licensing Exporting Risk

V A Final word Explained the important factors in selecting entry modes and key aspects in their management.

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